The richest people in the world started their own companies. Their sizeable stock positions allow them to generate enormous wealth. The key to women becoming as powerful as men is on the balance sheet not the profit and loss statement. The unlock is on the closely guarded cap table.
The Equity Gap is the gap no one is talking about. And yet, for founders, startup employees or even employees at firms with meaningful stock options – equity, not salary, is actually what may create the real economic breakthrough. Much has been written on the Pay Gap – the $0.20 difference in pay between men and women for the same job. But far less has been written on what may be an even more striking gap with potentially longer-lasting effects – the Equity Gap: the difference in equity ownership between men and women for like positions.
The equity gap starts with that highly negotiated decision around equity ownership when a founder first takes on investors or in the boardroom when directors are setting equity compensation plans for key hires. Given the way equity works, these one-time decisions about ownership and upside have exponential impact … or in the case of females, not. The cumulative effect is the equity gap: female founders on average end up owning less of their company than male founders.
When it comes to equity, research by Carta reveals that women own $0.47 compared to every $1 owned by a male; a gap that widens further to $0.39 if you specifically compare Female Founders to Male Founders. This is over 2.5x as large as the Pay Gap with effects that accumulate exponentially over time. And has remained persistent since Carta started reporting on this at the urging of #Angels in 2017. It deserves greater attention.
Breaking the Equity Gap Down
The reason the Equity Gap is so striking is not only because of the sizable difference in percentage ownership, but because of its compounding effect over time. When a company performs well, earnings from the equity far exceed annual salary or bonus. Equity, particularly in start-ups, is the real driver behind step-change or life-changing wealth creation. As a result, individuals that own large amounts of equity benefit disproportionately from big exits and acquisitions.
Let’s walk through a simple example.
The median exit value through IPO in 2020 was approximately $525M according to Pitch Book. At this valuation, a male founder owning 20% of the equity value at IPO would earn him $105M, ignoring complexity around earn outs, lock-ups etc. Consider now a female founder who owns just $0.39 for every $1.0 owner by her male counterpart. Her earning would be just $42.0M in comparison or $63M less. At an average founder CEO salary of say $75,000-$100,000 even over an average time to IPO of 6.5 years, it becomes quickly obvious why the equity gap is a much bigger deal.
Even worse, the size of this opportunity cost grows larger post exit. The cash from exits and acquisitions gives individuals the flexibility to turn around and invest in new companies or venture funds or launch startups of her own which in turn provide additional wealth creation opportunities. This is the compounding benefit of equity ownership in successful ventures.
How Does this Happen?
The Equity Gap occurs as equity ownership is allocated between founders, employees and investors during investment and hiring.
The initial wedge: ownership at investment
The Equity Gap for a female founder gets its start if a founder is valued below her male peers or asks for less equity when receiving investment. This results in relatively greater equity dilution at the beginning of her journey which will likely grow over time as she brings on additional capital. The question is why would a female founder be valued below a male founder? Research indicates that female founders may be at risk to valuation penalties on several fronts.
First, allocating equity during an investment negotiation involves an assessment of both risk and potential. Parallel data shows that female founders are perceived as lower potential and/or higher risk than male founders.
In an experimental study, investors were found to ask women and men very different questions resulting in substantially different outcomes for each gender. Specifically, in venture capital, men were 2x as likely to receive funding for an identical pitch given by a women after being asked potential versus risk questions.
Female founders may also be implicitly penalized for starting companies in “male-led” industries. For example, Kanze and colleagues found in an observational study that female-led ventures in male dominated industries received a lower valuation.
Alternatively, female founders may not ask or negotiate for as much equity as male counterparts. In an academic study of early-stage startup pitches, researchers found that female founders may receive lower valuations at least in part due to offering higher ownership to investors for less capital. Importantly, the authors of this study also found evidence that founders would not have “lost” had they asked for higher valuation of ownership.
Whether a result of implicit bias or differences in approach to negotiation between men and women - the cumulative effect is the Equity Gap or #GapTable: female founders on average end up owning less of their company than male founders.
Stock compensation plans
Second, female employees appear to be granted less equity as part of their compensation package. This is likely the twin sister of the Pay Gap as negotiations often occur simultaneously with cash compensation. In spite of similar DNA, the Equity Gap could be at least 2x worse in outcome because of the inherent complexity and differences in stock compensation packages.
For example, while cash compensation may translate directly as an employee moves from a large public company to a start up, stock compensation is likely to differ wildly making bench-marking challenging. Based on both of our ten-year+ experiences in the start-venture world, a lack of awareness and education around the Equity Gap likely influences negotiating priorities, with more emphasis on pay equity. The result is likely a weakened negotiating position within an already challenged compensation arena.
What Do We Do
Closing the Equity Gap has the potential to transform the gender composition of the entrepreneurial and investment world as much, if not moreso, than closing the Pay Gap. This would put more women into the powerful role of direct investor, limited partner, and financial investor. More on this can be found in renowned Wharton Professor and renewed economist Mauro Guillen’s recent book 2030: How Today's Biggest Trends Will Collide and Reshape the Future of Everything highlights the impact female control over wealth can have on everything from investment to spending to philanthropy.
Closing the Gap Table will require a concerted effort on multiple fronts and a long-term perspective.
We need, as one example, to continue to push towards gender parity within the investor community and in the boardroom. As has been well-published, boards, management teams and investment professionals, who largely control how equity is invested and allocated among individuals, remain predominantly male: women make up only 8% of VC Partners, 15% of public board members, and receive an all-time high of 2% of VC funding.
However, there are simple actions investors and founders should take today to bring the Gap Table into the spotlight.
For investors and boards: collect the devastating data
Investors and Boards of Advisors should collect, analyze and monitor demographic, pricing (valuation) and ownership data across their portfolio and within their companies, at both the founder and key employee level. Differences company by company in equity ownership may be explainable. However, systematic differences by gender probably means (like it or not) there is bias that must be addressed. As the infamous Harvard Business School professor Frances Frei has said about driving culture change: you must start by collecting the devastating data.
The data can then inform action. For example, board of director compensation committees should study and put in place equity (and salary) bands and DEI-specific policies to limit the situational ambiguity in negotiations which has been shown to exacerbate the gender gap.
We find a positive framing helpful in engaging key stakeholders in these exercises, as they are - are not just corrective, but innovative adaptations necessary to thrive in a more inclusive economy.
For female founders and employees: negotiate ambitiously
Female founders should seek comparables and input from other founders, including male founders when they are negotiating ownership with a venture investor. Finding and using valid comparatives in negotiation price and/or incentive packages can be a valuable tool to ground the negotiation and instill confidence the “push back” or “ask” is fair while helping females avoid the documented catch-22.
Female founders can also consider a ownership vs. price-based approach, communicating, for example, x% ownership is important versus a specific valuation target. This allows investors to get creative in meeting those goals.
Female employees should confidently ask company leaders or the board for comparables on equity compensation packages both within the company and the industry. They should specifically ask how their equity compensation plan compares to male peers. They should seek data from peers, head hunters, etc. to determine “market value” and negotiate actively and without shame.
Talk About the Gap Table
The Gap Table highlights an important additional lost opportunity for female owners that must be more thoroughly researched, discussed and addressed. A first step is to bring it from the shadows of carefully protected capitalization tables into the public eye. It also takes a first step in outlining actions that investors, boards, founders and employees can take to demand data, ask the hard questions and acknowledge bias in order to drive change.
While small, we believe that change in culture and in outcomes can and will be influenced by the cumulative effect of individual actions.
Megan Bent is the co-founder and Managing Partner of Harbinger Ventures, a 2021Fast Company Most Innovation Company. A lifelong investor and entrepreneur, Megan has spent the past decade working to identify and scale high-growth, early stage companies in the consumer sectors. In launching Harbinger, Megan began leveraging a model that emphasizes female leadership and foster close collaboration among entrepreneurs and investors. Prior to Harbinger, Megan was a Managing Director at Revelry Brands.
Caitlin Brumme is a Senior Vice President at MassChallenge, a global nonprofit which equips bold entrepreneurs to disrupt the status quo. Caitlin has a decade of experience in the field of re-imaging capitalism including ESG and impact investing, social entrepreneurship, and technology and society. Prior to MassChallenge Caitlin launched and led the Impact Collaboratory at Harvard Business School - a multifaceted, multi-faculty effort to advance research and practice of investing in the 21st century.